The Ski Slope Market: What’s Next in 2014?
Skiing — or snowboarding, in my case — is a lot like investing in the stock market: a bumpy ride. Snow, wind, ice, and moguls are common for seasoned skiers, and interest rate fluctuations, commodity price spikes, geopolitical turmoil, and -10 percent corrections are ordinary occurrences for veteran equity investors. However, in 2013, stock investors enjoyed pristine conditions, resulting in the best year for the Dow Jones Industrial Average since 1996. Individuals owning stocks witnessed their portfolios smoothly race to sunny, powder-like returns. More specifically, a December Santa Claus rally (S&P +2.4 percent for the month) capped off a spectacular year, which resulted in the S&P 500 Index soaring +30 percent, the Nasdaq Composite Index +38 percent, and the Dow +26 percent.
Despite the meteoric move in stocks this year, many observers missed the excitement of the equity ski slopes in exchange for lounging in the comfort of the deceivingly risky but warm lodge. In the lodge, these stock-frightened individuals sipped hot cocoa with wads of inflation-losing cash, bonds, and gold. As a result, these perceived safe assets have now become symbolic relics of the 2008-2009 financial crisis. In the short run, the risk-averse coziness of the lodge may feel wonderful, but before the lounging observers can say “bull market,” the overpriced cocoas and holiday drinks will eat holes through retirement wallets and purses.
As you can see from the chart below, it is easy for the nervous lodge loungers to vividly remember the scary collapse of 2008-09 (point A to B). Surprisingly, many of these same skeptics are able to ignore or discount the explosive move of 2009-13 (point B to C). There’s another way of looking at this volatile time period. Had an investor fallen into a coma six years ago and then awakened today, an S&P portfolio would still have risen a respectable +26 percent (point A to C), plus more than +10 percent or so from dividends.
Turbulent times on back-country bond and gold trails
While stockholders have thoroughly enjoyed the recent climate, the 2013 weather conditions haven’t been as ideal for gold and bond investors. Gold investors felt less than precious in 2013 as they went flying off a cliff and broke a leg. In fact, the shiny metal suffered its worst performance in 30 years and underperformed stocks by a whopping -58 percent. With this year’s -28 percent loss, gold (NYSEARCA:GLD) has underperformed stocks over the last six years, after including the impact of dividends.
Like gold traders, most bondholders were wounded in 2013 as well, but they did not get completely buried in an avalanche. Nevertheless, 2013 was a rocky ride overall for the bond haven hunters, as evidenced by the iShares Barclays Aggregate Bond composite, which fell -4 percent. As I’ve discussed previously, in Confessions of a Bond Hater, not all bonds are created equally, and many Sidoxia client portfolios include shorter-duration bonds, inflation protection bonds, convertible bonds, floating rate bonds, and high-yield bonds. Structured correctly, a thoughtfully constructed bond portfolio can outperform in a rising rate environment like we experienced in 2013.
Although bonds as a broad category may not currently offer great risk-reward characteristics, individuals in the mid-to-later part of retirement need less volatility and more income, attributes bonds — not stocks — can offer. In other words, certain people are better served by snow-shoeing or going on sleigh rides rather than risking a wipeout or tree collision on a downhill ski adventure. By owning the right types of bonds, your portfolio can avoid a severe investment crash.
Positive 2014 outlook, but helmet advised
With the Nasdaq index having more than tripled to over 4,176 from the 2009 lows, napping spectators are beginning to wake up and take notice. After money hemorrhaged out of the stock market for years (despite positive total returns in 2009, 2010, 2011, and 2012), the fear trend began to reverse itself in 2013, and investment capital began returning to stock funds.
Adding fuel to the bull market fire, International Monetary Fund head Christine Lagarde recently signaled an increase in economic growth forecasts for the U.S. in 2014, thanks to an improving employment picture, successful congressional budget negotiations, and actions by the Federal Reserve to unwind unprecedented monetary stimulus. If you consider the added factors of rising corporate profits, improving CEO confidence (e.g. Ford expansion), the shale energy boom, an expanding housing market, and our technology leadership position, one can paint a reasonably optimistic picture for the upcoming years.
Nonetheless, I am quick to remind investors and clients that the pace of the +30 percent appreciation in 2013 is unsustainable, and we are still overdue for a -10 percent correction in the major stock indexes.
The fundamental outlook for the economy may be improving, but there are still plenty of clouds on the horizon that could create a short-term market snowstorm. Domestically, we have the upcoming 2014 midterm elections, debt ceiling negotiations, and a likely continuation of the Federal Reserve tapering program. Abroad, there are Iranian nuclear program talks, instability in Syria, meager and uncertain growth in Europe, and volatile economic climates in emerging markets like China, Brazil and India. After such a large advance this year, any one of these concerns or some other unforeseen event could provide an ample excuse to sell stocks and take some profits.
Since wipeouts are common, a protective helmet in the form of a valuation-oriented, globally diversified portfolio is strongly advised. For seasoned skiers and long-term investors, experiencing the never-ending ups and downs of skiing (investing) is a necessity to reach a desired destination. If you have trouble controlling your skis (money/emotions), it’s wise to seek the assistance of an experienced instructor (investment adviser) so your investment portfolio doesn’t crash.
Wade Slome CFA CFP is president and founder of Sidoxia Capital Management and shares his investing insights at Investing Caffeine.
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